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The risk-free rate is 0%. The market portfolio has an expected return of 20% and a volatility of 20%. You have $100 to invest. You decide to build a portfolio P which invests in both the risk-free investment and the market portfolio.

The risk-free rate is 0%. The market portfolio has an expected return of 20% and a volatility of 20%. You have $100 to invest. You decide to build a portfolio P which invests in both the risk-free investment and the market portfolio.

a. How much should you invest in the market portfolio and the risk-free investment if you want portfolio P to have an expected return of 40%?

b. How much should you invest in the market portfolio and the risk-free investment if you want portfolio P to have a volatility of 10%? Instead of investing in the market portfolio, you decide to invest in individual stocks. After some research, you decide to invest all your $100 in AMD’s stock because you really like its CEO. AMD has a volatility of 40%. AMD’s return has a correlation of 0.8 with the market portfolio.

c. What is AMD’s beta with the market?

d. What is AMD’s expected return?

e. What is AMD’s Sharpe ratio?

f. Can you achieve a higher Sharpe ratio by investing in the market portfolio? First answer the question, then show the argument or calculation.


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